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CHAPTER
12
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WHAT
IS
BOOKKEEPING?
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books of accounts, one is not free to write the accounts, the way one likes. They
have to be written as per the norms and principles of techniques and systems of
accounting used the world over. There are a few accounting techniques available for writing accounts but the Double Entry Bookkeeping System has universal acceptability and credibility. It is the modern and scientific accounting
system designed to reflect the true and fair position of the business.
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Thus several types of transactions take place in business and they form the starting point of accounting. There are two types of transactions: (i) Cash transactions
and (ii) Credit transactions. Cash transaction results in exchange of cash, while
credit transaction results in an obligation to pay / receive cash in the future.
Accounts
Transactions involve accounts. Each transaction has to be done through an
account. There are total three types of accounts:
i. Personal Account or Individual account: This group of accounts
includes all accounts of individuals and organisations like a firm, a
corporate entity, a society, etc.
ii. Assets Account: This group of accounts covers all types of assets.
Assets mean all those investments made in tangible or intangible
form of assets, which have utility value or use value. Moreover,
these assets can also be disinvested and converted into cash.
iii. Income-Expenditure Account: This group of accounts encompasses
all accounts, which represent revenue income and revenue expenditure of the business.
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Date
Explanation:
i. Date: The journal entries must be written date-wise in a chronological sequence. It is ideal to make entries of the transactions daily. The
year, month and date of the transaction for which journal entry is
made should be mentioned in the Date column.
Bookkeeping and Accounting and Financial Statements
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Ledger
A ledger is a book, which contains details of all accounts in which transactions are made. It contains a condensed and classified record of all business
transactions transferred from the journal or subsidiary books. Ledger is the
principal book under the double entry bookkeeping system. It contains up-todate information about all accounts, e.g. if an owner wants to know how much
he/she owes to Mr. X, he/she can learn this from Mr. Xs account maintained
in the Ledger. If such accounts were not maintained in the ledger, the owner
would be required to go through each transaction involving Mr. X to find out
the payment liability. This exercise is time-consuming and inconvenient. For
businesses with a sizeable number of transactions, it is impossible to scan the
primary books or journal every time to know the exact position of any
account. It is, therefore, very important to maintain a ledger.
A suggestive format for maintaining an account in the ledger is given
below:
Debit Side
Date
124
Particulars
Folio
No.
Amount Date
Particulars
Chapter Twelve
Credit Side
Folio
No.
Amount
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Explanation:
It may be noticed from the format that a ledger account has two sides: debit
side (left-hand side) and credit side (right-hand side). Each side is further
divided into four sections, viz. Date, Particulars, Journal Folio Numberand
Amount.
i. Date: In this column, the date of a transaction as entered in the journal book from where the entry is brought to the ledger account, is
mentioned.
ii. Particulars: In this column the name of the account in which the
corresponding credit or debit (under the double entry principle) is
found, is mentioned.
iii. Journal Folio Number: In this column the page number of the journal book or subsidiary book from where the transaction is brought to
the account is mentioned.
iv. Amount: In this column the amount, with which the account is debited or credited, is mentioned.
Transactions
Transactions are entered, as and when they occur in the journal book or subsidiary books. From there necessary records are created in the ledger. The
process of transferring entries from the journal or subsidiary books to the
appropriate accounts in the ledger is called posting. If an account is debited
with an amount as entered in the debit column of the journal book, the same
is posted to the debit side of the account in the ledger. Similarly, if an account
is credited in the journal book, it is posted to the credit side of the account.
While posting entries, care should be taken to see that the name of the account
in which the entry is posted is not mentioned in the column of particulars.
Instead the name of the other account, which is affected under the same transaction, should be mentioned. While posting, each entry to the debit side of an
account should begin with the word To (in the Particulars column) and
each entry to the credit side should begin with the word By.
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of the account. If the total of debit side is greater, then the balance is
called debit balance and if it is vice versa, it is called credit balance. For
example:
i. Following accounts always have debit balances:
a. Cash Account/Bank Account
b. Assets Account
c. Debtors Account
d. Stocks Account
e. Revenue Expenses Account
f. Losses Account
g. Investment Account
ii. Following accounts always have credit balances:
a. Creditors Account
b. Revenue Income's Account
c. Gains or Profit's Account
d. Bank Loan Account
e. Interest Received
As seen earlier, the journal book is the first book required to be kept in
the business where all transactions are recorded. It is the book of original
entry. Likewise, the ledger is the most important basic book, which records
all accounts. So long as the transactions in the business are limited and
simple, it is possible to enter all transactions first in the journal book and
then in respective accounts in the ledger. But with the size of a business
and the number of transactions increasing, it becomes difficult to maintain a
journal book for all the transactions and post them in the ledger. Under such
circumstances, it becomes necessary to divide the journal books and the
ledger into some separate subsidiary books, each of which is reserved for
recording one particular class of transactions, e.g. purchase book, sales book,
cash book, etc.
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BOOKS NEEDED TO BE
ACCOUNTING SYSTEM
MAINTAINED FOR A
SIMPLE
For a small industrial enterprise, the usage of the simple financial accounting
system is recommended. Such businesses must maintain a set of books as suggested below. By doing so, the businesses can get a correct and fair picture of
the activities speedily.
a. Journal: All transactions (except those which are to be recorded in subsidiary books) are properly recorded here.
b. Subsidiary books (for journal)
i. Purchase book: In the purchase book, all transactions pertaining to
purchases, be it on credit or by cash, are recorded. Transactions of purchase returned are also recorded here separately.
ii. Sales book: In the sales book, all transactions pertaining to credit or
cash sales are recorded. Transactions of sales returned are also
recorded separately.
iii. Ledger: All accounts involved in the transactions recorded in the journal or its subsidiary books are maintained here, and necessary posting
is made.
iv. Cash book: The cashbook is a subsidiary book of the ledger where the
account of `cash' is maintained. Transactions involving petty cash are
also posted here separately.
v. Bank book: The bankbook is a subsidiary book of the ledger where the
account of `bank' is maintained.
vi. Stock register: This is a register where the movement of stock is
maintained.
The formats for the journal book and the ledger accounts were discussed earlier. The formats of subsidiary books like purchase book, sales book, cashbook, bankbook and stock register are given here along with a brief explanation for its usage.
Format of a Purchase Book
Date
Party's
Name
Bill
No.
Ledger Item
Folio
Name
Quantity
Rate
Amount
Terms
Total
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Explanation:
i. Date: The date on which the purchase was made is mentioned here.
ii. Particulars: The name of supplier of the materials and necessary
details of the invoice are mentioned here.
iii. Bill No.: The number of the bill of the supplier is mentioned here.
iv. Ledger Folio: The folio number of the ledger, on which either the
supplier's account (if credit purchase) or cash account (if cash purchase) is credited, is mentioned here.
v. Amount: The net amount of purchase made is mentioned here.
vi. Terms: The terms of purchase, as on cash terms or credit terms, etc.,
are mentioned here.
Format of a Sales Book
Date
Party's
Name
Bill
No.
Ledger Item
Folio
Name
Quantity
Rate
Amount
Terms
Total
Explanation:
i. Date: Date on which the sales transaction took place is mentioned here.
ii. Particulars: The name of the purchaser of the goods and necessary
details of the transaction are mentioned here.
iii. Bill No.: The number of the bill given to the buyer is mentioned here.
iv. Ledger folio: The folio number of the ledger on which either the
buyer account (if credit sales) or cash account (if cash sales) is debited is mentioned here.
v. Amount: The amount of sales done through this transaction is mentioned here.
vi. Terms: The terms of sales transactions like, cash or credit is mentioned here.
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Particulars
Journal
Folio
Amount
Date
Particulars
Journal
Folio
Amount
Closing
Balance
Total
Total
Explanation:
The Cash Book is nothing but a cash account. Like other asset accounts, this
account is also required to be mentioned in the ledger. However, because of
the multiplicity of cash transactions and for convenience, cash account is not
maintained in the general ledger but maintained as a separate account and
named as cash book. All the rules of maintaining accounts in ledger apply to
this account also.
Format of a Bank Book
Debit side(Receipts)
Date
Particulars
Journal
Folio
Date
Particulars
Journal
Folio
Amount
Closing
Balance
Total
Total
Explanation:
Like cash book, bank book is nothing but the bank account required to be
maintained in the ledger. Since the transactions involving bank are increasing, it is convenient and proper to keep a separate bank account where all
transactions involving the bank are posted. This account, therefore, is separately maintained and named bank book. All rules of making posting in other
ledger accounts are applicable to this account as well.
Bookkeeping and Accounting and Financial Statements
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Particulars
S.B./ P.B.
Folio No.
Receipts
Issues
Balance
Explanation:
The stock register is very similar to the stock account. It tells us about the
actual closing stock available with the business to help the owner physically
verify and place further orders.
i. Date: The date of transactions resulting in movement of stock is put
here.
ii. Particulars: The details of transactions due to which the stock
changes, are narrated here.
iii. Sales Book/Purchase Book Folio number: The page number of the
sales book or purchase book where the particular transaction resulting in addition or deduction of stock is put here.
iv. Addition: Purchase resulting in addition of stock. The quantity of
stock purchased along with its value is put here.
v. Deduction: Sales result into deduction of stock. The quality of
stocks sold along with its value is put here.
vi. The Closing Balance: The amount that accrues, as a result of addition or deduction is calculated and put here.
vii. Itemwise separate page is to be kept in Stock Register.
FINANCIAL STATEMENTS
The main objective of bookkeeping is to record all transactions according to
the accepted accounting principles and practices. But only proper recording
of transaction is not adequate. Unless the various accounts recorded are properly classified for summary, it becomes difficult to visualise the total picture
of the business. It is, therefore, very essential to summarise all those accounting details recorded by maintaining various books and to present them in an
acceptable form. Financial statements are such forms in which all accounting
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details are presented for the use of various users like owners, bankers, creditors, tax authorities, government, suppliers, etc. With the support of the
financial statements, one can understand the financial position of the business
meaningfully.
Name of Account
Debit closing
Credit
balance
closing balance
Total
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Explanation:
i. Ledger Folio: In this column the folio number (page number) of the
ledger or its subsidiary books where a particular account is maintained, is
written. This helps in crosschecking the accuracy of accounts.
ii. Name of Account: In this column, the name of the account whose closing
balance is being brought to the trial balance is written.
iii. Debit/Credit closing balance: In these columns, the amount of debit and
credit closing balances of individual account is mentioned.
It may be noted that a single account at a time cannot have both debit
and credit balances. If an account has a debit closing balance the amount
of that balance is mentioned in the debit column of the trial balance
against the name of the respective account. Similarly, if an account has
a credit closing balance, it is mentioned in the credit column of the trial
balance.
iv. Total: When the closing balances of all accounts from the ledger and its
subsidiary books are brought to the trial balance one by one, the totals of
account in the debit column and the credit column are made and tallied.
One should remember that:
a. Closing balances of all Assets Accounts, Revenue Expenses
Accounts and Losses Accounts are always debit balances.
b. Closing balances of all Revenue Income Accounts and Gain
Accounts are always credit balances.
c. Accounts of individuals to whom the business owes money always
have credit balances and accounts of individuals who owe money to
the business always have debit balances.
d. Loan (Taken) Accounts always have credit balances.
e. Cash Account always has debit balance.
If the totals of debit and credit columns of the trial balance do not agree, it
means there is some mistake in preparing the accounting books. The mistake/s, traced and rectified would tally the trial balance. However, there are a
few mistakes, which cannot be detected by trial balance, such as:
i. Errors of Principle
ii. Errors of Omission
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Amount
Credit Side
Amount
Particulars
Net Loss
(Balance Figure)
Total:
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Explanation:
i. Particulars: In this column, on the debit side, names of the following
accounts are mentioned individually:
a. All accounts of revenue expenditure
b. All accounts of revenue losses
Names of the following accounts are mentioned on the credit side:
a. Sales account
b. Closing stock account (if it is adjustment entry)
c. Accounts having credit effect of adjustment entries
ii. Amount: The respective amount of debit and credit balances of the
accounts, which are brought to the P&L account, is mentioned in these
columns on debit and credit side against the names of their respective
account head.
One should also keep in mind the following:
i. The P & L account contains all Income and Expenditure Accounts.
Not a single account from either individual, Personal Accounts or
Asset Accounts can be brought to the P & L account. All accounts of
Income and Expenditure Accounts get closed when they are brought
to P & L account while the balance of Personal/Individual Accounts
and Asset Accounts get carried forward to the subsequent year. All
income generated and expenditure incurred during the whole period is
mentioned in the P & L account.
ii. Subsequent to bringing all balances of the accounts to concerned
debit and credit sides, the total of their balances is made. If the total
of credit side is more than the total of debit side then the business is
said to have made net profit. The amount by which the total of the
credit side exceeds the total of the debit side of the P&L account is
called the Net Profit generated during the accounting period.
Similarly, the amount by which the total of the debit side exceeds the
total of the credit side of the P & L account is called Net Loss generated by the business during the year. Thus both figures of net profit
and net loss are balancing figures. Adding them up with the total of
the debit or credit side as the case may be would make the totals of
both the sides tally. This is a situation where total income is equal to
total expenses.
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Thus, if
i. Total of credit side > Total of debit side
of P&L A/c.
of P&L A/c.
= Profit
= Loss
= No profit/no loss
Net profit or net loss is the result of business operations during the accounting period. They are transferred to the balance sheet where the capital account
representing the financial involvement of the promoter is increased or
decreased appropriately by the figures of net profit or net loss.
iii. Balance Sheet
A balance sheet is a statement prepared for measuring the true financial position of a business at a certain point of time (normally the last day of the
accounting period). It is essential to prepare the balance sheet (i) to ascertain
the results of business operations during the accounting period; and, (ii) to
know the financial position of the business at a particular point of time. The
profit and loss account serves the former objective while the balance sheet
serves the latter.
As seen earlier, all the accounts pertaining to the group of Income and
Expenditure Accounts are taken to the profit and loss account. The accounts
pertaining to the remaining groups, viz. Personal or Individual Accounts
and Assets Accounts are brought to the balance sheet. The accounts brought
to the balance sheet are not closed. Their closing balances at the time of the
balance sheet are carried forward to the subsequent accounting period. They
are shown on the balance sheet only to apprise the users about the position of
the accounts at that particular time. The balance sheet should be prepared in a
prescribed format so that its understanding becomes easy. Given below is a
prescribed format of the Balance Sheet.
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Amount
Assets
Amount
Fixed assets
Investments
Loans and Advances
(Given)
Current Assests
(i) Stocks -----(ii) Debtors -----(iii) Cash -----(iv) Bank -----Balance -----Accumulated Losses
Total
Total
Explanation:
It has been explained above that the balance sheet reveals the true and
fair position of a business at a particular point of time. Thus, the balance
sheet gives the details of what the business owns and what the business
owes. Whatever the business owns is termed as Assets and whatever the
business owes is termed as Liabilities. All liabilities are mentioned on
the left-hand side of the balance sheet, while assets are shown on the righthand side.
Assets
Assets are classified under the following broad heads:
i. Fixed Assets: Fixed assets are of permanent nature and the underlying
motive of the business is to utilise them for value addition. The total value
of fixed assets at the close of the accounting period is shown on the balance sheet.
ii. Current Assets: Current assets, unlike fixed assets, do not permanently
maintain the same form. In whichever form they may be, they are likely to
be converted in the form of Cash or Bank Balance in the near future.
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Chapter Twelve